Canadian Dollar Forecast April 2015
Canadian Dollar Forecast April 2015
The US dollar was on a strong uptrend over the last year and USD/CAD has now entered a rangebound patter looking for direction. Over the first three months of the year, the Canadian dollar has fallen about 8% compared to the US dollar.
USD/CAD has ranged between 1.24 and 1.28 over the last month. The US dollar has had strength vs. a broad range of currencies and not only the Canadian dollar.
The overall weakness in the Canadian dollar has been driven by weak oil prices, lack of strong economic growth, and the Bank of Canada policy outlook. Much of these same trends are expected to continue and remain headwinds for the Canadian dollar.
The Canadian dollar bears are hoping that oil inventory levels in the US continue to rise and oil prices continue to remain weak. Moreover, coupling this with a continued strong US economy and labor market, will force the US Federal Reserve to increase interest rates sooner rather than later and will cause flow of funds in to the US dollar.
Canadian dollar bulls are hoping oil prices to stabilize and tensions in the middle east to force oil prices to rise. As oil companies cut production, this will help reduce supply and push oil prices higher. Moreover, if the Canadian economy can work through the near term issues in the resource sector, and the economy can adjust and continue to grow, hopefully pushing inflation higher and getting the attention of the Bank of Canada again. This could take some time, but economic growth and rising oil prices are surely what is needed for the Canadian dollar to rebound.
Look for the US dollar to remain strong and continue to climb higher, but at a much slower pace as much of the gains have been had. USD/CAD at 1.30 is a reasonable medium term target if these trends continue.
Oil prices have ranged around $48/bbl and continue to put pressure on Canada’s economy and resource sector. Increasing supply of oil and rising inventories in the US and slower growth in China are causing weak oil prices. Many expect it to get worse before it gets better. Even the Bank of Canada has admitted to watching oil prices closely. Rig count data and US inventory levels are being closely watched to determine the supply side of the equation.
Geopolitical events and tensions in the middle east could provide a boost to oil prices through volatility. Issues between Saudi Arabia and Yemen are something to keep an eye on. Typically tensions in the middle east start to boost oil prices. However, the US’s recent nuclear framework with Iran could allow Iran to provide oil to the global markets with the removal of sanctions and this could put further pressure on oil prices in the longer term.
What is clear is the oil based economies are having issues and it can take some time before their weakened currencies start to provide export growth.
Canadian Economy and Bank of Canada
The main driver of the US dollar has been the interest rate and growth differentials between the Canadian and US economy. Canada’s growth in the first quarter was nowhere close to that of the US. Moreover, the impact of weak oil prices continues to trickle through the economy. That being said, many had expected Canada to fare even worse than it has and it has been a slight positive the way Canada has weathered the storm of weak oil prices.
With Canada having a weaker economy, not as much job growth, and no inflation threat, the Bank of Canada is in no rush to raise interest rates at all. The Bank of Canada has backed away from their initial stance of another rate cut after the first surprise rate cut in January.
Canada had 2.25% GDP growth in 2014 and it is not expected for Canada to be able to achieve 2% growth this year. The manufacturing sector in Canada should benefit from the weaker loonie and growth in this sector should help offset weakness in the oil sector.
Stronger US growth will be a boost to Canada’s export sector as what is good for the US is eventually good for Canada. Overall, the Canadian economy will take some time to get through the near term issues in the resource sector.
The US economy continues to perform better than the Canadian economy but growth has slowed somewhat in 2015 and there are some pockets of weakness or moderation in growth. Broad based US dollar strength has started to take its toll on the export sector and small cracks have started to show. The US consumer continues to benefit from weaker oil prices and the booming US labor market has unemployment to a near 7 year low at 5.5%. Overall US inflation is steady but is expected to creep higher as the US economy strengthens throughout the year.
The timing of the first interest rate hike is uncertain with many expecting the rate hike to be in the fall as opposed to the summer of this year. Higher US interest rates will lead to flow of funds in to the US and this will cause the US dollar to gain strength. As long as the US economy remains strong an interest rate hike remains a strong catalyst for a strengthening US dollar.
Knightsbridge Foreign Exchange has based the opinions expressed herein on information generally available to the public. Knightsbridge Foreign Exchange makes no warranty concerning the accuracy of this information and specifically disclaims any liability for trading decisions based on the opinions expressed and information contained herein. Such information and opinions are for general information only and are not intended to present advice with respect to matters reviewed and commented upon.